The economies of all countries whether under developed, developing or developed are all suffering from recession these days. Persistent rise in prices or inflation is a major concern and problem in today’s world. It is merely due to various reasons i.e. first, the inflation rates are pretty high as compared to the experienced earlier periods. Secondly, in these years high rate of unemployment coexists with inflation, which is a newly faced phenomenon and has made it difficult to control inflation in this era of global recession.

Developing countries may face difficulties in establishing an effective and operative monetary policy. The primary difficulty faced is that a few developing countries have deep markets in government debt. The matter is further complicated by the difficulties in forecasting fiscal pressure and money demand to levy the inflation tax by rapid expansion of the monetary base. The central banks have poor records in managing monetary policy in many developing countries. This often happens when the monetary authority is not independent of government in developing countries, thus good monetary policies are left behind in the political desires of the government or are used to quest for other non-monetary goals. For this and other reasons, a currency board or dollarization may be instituted by developing countries that want to develop a credible monetary policy. Such forms of monetary institutions restrict the government from interference and it is desired that such policies will import the monetary policy of the anchor nation.

Controlling inflation has been a top priority for policy makers all over the world since the 1970’s. It is a consensus amongst economists and policy makers that price stability is the prime objective of monetary policy despite of a long and unsettled theoretical debate. Thus, it is the responsibility of the central bank to maintain price stability and it is

accountable for not achieving price stability. State Bank of Pakistan (SBP) like other central banks of the world is also explicitly mandated to ensure price stability. It is well established that SBP is fully capable of implementing its own independent monetary policy that is consistent with the needs of the domestic economy and is able to foresee and achieve the inflation targets ahead.